We recently had the opportunity to interview Jeff Appel, mortgage professional extraordinaire, regarding the credit markets today and what buyers can do to empower themselves. Here are the gems of wisdom he shared with us, in terms of navigating the often turbulent waters of the mortgage market:
- Confirm that the projects you’re looking to bid on are approvable. Nowadays, it’s not just you who needs to be approved but your building as well. Speak directly with a lender and have them access whether the buildings you’re looking at are Fannie approved or meets bank standards. Because each bank has its own requirements, you need to speak with all of the ones that you are considering using.
- Make sure that you are prequalified for a mortgage. There are lots of products out there, unlike what you may be hearing in press. Your income and credit need to be sufficient to meet the bank’s credit standards, which look to credit scores, the number of credit lines available, how long you’ve had them open, etc.
- Credit scores: for jumbo loans, you definitely need a score over 700, with the next milestones being 720 and 740. Thereafter, any incremental increases don’t make much of a difference. For conforming loans, the minimum score to have is 680, with the next thresholds improving your rate (700/720/740 like the jumbo breakpoints). Jeff noted that borrowers in NY tend to have solid profiles, and he’s not seeing many disqualifications based on credit scores.
- Payment history: not rocket science but make sure you’ve made payments on time. For jumbo loans, you can have no lates on mortgage payments whatsoever and need a suitable explanation for any other kind of late payments. For conforming loans, you may have late payments in 20% or fewer of your accounts, as long as there is a suitable explanation for them.
- Minimum number of credit lines: for conforming loans, you need 3 lines with a 12 month history and at least one of them needs to be open. For jumbo loans, you need 3 open credit lines with a 12+ month history, 1 line with a 24-month history, and at least 3 open credit lines altogether.
- Income: watch out for how your bonus is calculated (and whether your bonus is accelerating or declining.) If your bonus is declining, i.e. less than the previous year, the bank will use the lower of the two numbers and will verify that you are on target to get a similar bonus for this year. If your bonus is accelerating, the bank averages the last 2 years’ bonuses and verifies that they are likely to continue. If more than 50% of your income is derived from bonuses, greater scrutiny is placed on your case, and the bank will undertake a more stringent underwriting of your loan package. Any other non-cash portions of your income are stripped out from the picture, even if they immediately vest.
- The self-employed and freelancers: first, you need at least 2 years of income to have any of it counted at all. If your income is declining, the lower number is used. Year-to-date earnings are aligned with previous years’ income. If it it’s accelerating, the bank averages the last 2 years. You need to remember that with the reduced tax liability that benefits the self-employed comes the reduced income … that’s the bitter pill. The bank looks only at your adjusted gross income; keep this in mind when you file your taxes next year.
- Be aware of all of the products out there: For example, the FHA has a 203k program that has been around for a while but few know about it. Buyers can borrow up to 97.5% of the purchase price of 1-4 family homes PLUS 97.5% of improvements that need to get made to the property. Lastly, note that the appraised value of the home will be based on the completed value post-renovations. Though it’s a process, (contractors needs to be approved for this program and the total loan amount can’t surpass the conforming loan limits of $729), the end result is quite compelling.
- Do your due diligence: in previous markets, buyers weren’t given the luxury of getting all the information they would otherwise want: the project’s financials, pending assessments, pending work to be done, the sublet policy, flip taxes, etc.
- Jeff recommends that you be the leader of YOUR team; you need to guide your lawyer, broker, etc. and ask the questions that someone would ask you if they were looking to purchase from you.
- Ask about the tax abatement phase-in schedules. How are major systems in the building (how old is the boiler, roof, etc.)? [Jeff notes that, although rarely used, most inspectors in NYC just turn lights and water faucets on and off, and they check for leaks and functional plug outlets; they can’t tell you whether balcony supports are under stress, for example.] Further, there is nothing wrong with asking for utility bills and understanding your energy costs. If you’re looking to budget your living expenses, there’s no reason to not ask what it actually costs to operate the property.
We hope you’ve found this information valuable and empowering. What’s certain is that the days of automated answers and decisions are long gone. Brokers, buyers, lawyers and lenders all need to approach a purchase with more scrutiny than in the past, and you can do so intelligently throughout the entire process. It’s a buyer’s market: make the most of it!